Practice Tips: Stimulating Growth with Alternative Fee Arrangements

Offering fixed-fee arrangements to clients offers many advantages to law firms, including regular work and cash flow. And more time spent with clients without the inhibition of a running meter can translate into a deeper understanding of the client’s needs, business, and challenges, which creates an opportunity for serving other legal needs the client may have.

Lewis Goldfarb was angry. He and his wife were buying a home in Fairfax County, Va., and he was trying to obtain title insurance. However, the required title examination could be performed only by a member of the Virginia State Bar, and not one of the 36 lawyers he had contacted would charge less than the amount fixed by the minimum-fee schedule published by the Fairfax County Bar Association. To buy his home, Goldfarb paid the fee, but he then brought a class action lawsuit against both the state and local bar associations alleging that the minimum-fee schedule amounted to price fixing and as such violated the Sherman Act. Ultimately the U.S. Supreme Court agreed, and found that by establishing a rigid price floor, such fee schedules were a classic case of price fixing and thus violated federal antitrust laws.1

In Wisconsin, fixed-fee schedules were first brought up at the 1928 State Bar convention when Mr. A.W. MacLeod, Wisconsin Supreme Court clerk, presented a fee schedule that he compiled from 19 local bar associations. The compilation gave the range of fees in each law practice category and eventually led to the promulgation of the first recommended statewide minimum fee schedule, which the State Bar association formally adopted in June 1929. In his “History of the Organized Bar in Wisconsin,” former State Bar executive director Phil Habermann wrote, “[T]he adoption of fee schedules by the bar association were, in light of the times and conditions, both essential and useful. The sad state of the bar economics …, fraught with nonbusinesslike practices and lack of record keeping, made the publication of the fee schedule … timely and helpful.”2 The minimum-fee schedule saw several revisions until its demise in 1973 following a U.S. Department of Justice anti-trust investigation on fixed fees.

The Rise of the Billable Hour

The antitrust issues and the 1975 Goldfarb decision ushered in the standardized use of the billable hour. Before Goldfarb, lawyers had usually charged clients based on an estimated fixed fee for a specific service. As transactions and litigation grew more complicated, knowledgeable clients became dissatisfied with these estimated methods of legal billing. After Goldfarb, hourly billing became a more transparent way to value legal services. Hourly billing also fit in well with law firm adoption of business accounting methods. To improve productivity, law firms simply required attorneys to bill at least a certain minimum number of hours each year. Annual increases in both the rate per hour and these minimum hourly requirements fueled growth in the profits of partners.

However, selling legal services as units of time may diminish the importance of both the quality of the work and the results achieved. Clients, especially business clients, will scrutinize their legal bills and look for ways to reduce the amount of time spent on their work, expecting the same quality and results for less cost. Lawyers, if rewarded for creating billable hours, might pay little attention to efficient methods of getting results but may spend excessive time evaluating every option no matter how unlikely or remote. Few businesses measure productivity solely by the amount of time their workers spend without regard to what those workers create. This point was made effectively by the late Chief Justice William Rehnquist, who observed in the mid-1980s that law firms bent on making as much money as possible were treating associates “very much as a manufacturer would treat a purchase of one hundred tons of scrap metal. If you use anything less than the one hundred tons you paid for, you are simply not running an efficient business.”3

Clients Want Alternatives

Recent economic challenges for clients have led to their increased scrutiny of the cost of legal services. Clients want to pay for results, not time. They want predictable costs, not surprises. The fundamental client objection to lawyers’ fees is uncertainty. Would you buy a refrigerator if the final price was known only after you made the purchase? How about getting on a flight and paying the airline in six-minute increments? As clients increase the pressure on their lawyers to deliver results on a fixed-fee basis, the law firms that offer alternative billing arrangements may gain clients from those firms still stuck in an hourly-billing method.

The Fixed-Fee Option

Karen Johnson-McKewan, a partner at Orrick, Herrington & Sutcliffe in San Francisco, recently made a deal with Levi Strauss & Co. that Orrick will handle all of Levi Strauss’s legal work worldwide in exchange for a fixed yearly fee paid in monthly increments. Levi Strauss will keep only one other firm, Townsend and Townsend and Crew, to continue its brand-protection work. In locations where Orrick doesn’t have an office, the law firm itself will retain and pay outside counsel.

Under a fixed-fee arrangement, a law firm and client agree on a fixed fee for all the client’s work, or all the client’s work in a particular practice area, or for various phases of work. Fixed fees often are used for specific repetitive transactions in which the work being done and the time it will take are reasonably predictable from historical experience. The fixed-fee arrangement offers many advantages to the law firm:

It ensures regular work and cash flow.

It allows the firm to offer the fixed-fee arrangement as an incentive to long-term, loyal, high-volume clients.

The law firm may have an opportunity to negotiate for other work at premium fees from the client if favorable results are achieved under the fixed-fee model.

Most important, the fixed-fee arrangement increases the opportunity for more positive client interactions. More time spent with clients without the inhibition of a “running meter” can translate into a deeper understanding of the client’s needs, business, and challenges. This often creates an opportunity for serving other legal needs the client may have.

Clients as Consumers

Large corporate clients frequently engage in business-to-business-style negotiations with their large law firms when establishing fees. However, most lawyers in Wisconsin represent individuals and small-business owners. When these types of clients have a legal issue, they are concerned with results and want to know what their total cost will be to achieve those results. Suppose a potential client has a relatively straightforward probate proceeding. Rather than quoting an hourly fee, it would be much more effective if the lawyer simply said, “This probate case will cost you $2,450.” Of course, even a straightforward probate, like many legal matters, can have variables outside the lawyer’s control that may affect the ultimate cost of the representation. Therefore, fee arrangements must provide alternatives if contingencies arise that may dramatically change the amount of work involved.

The “Case Plan” Option

In the probate example, instead of the standard attorney-client fee agreement, the lawyer could offer a “case plan.” This document contains a timeline illustrating the anticipated sequence of events. It details the entire course of the legal matter, the anticipated timing of events, a likely date of conclusion, an estimated fee, and the probable maximum fee. It also clearly notes the expected fees payable at each stage of the proceeding. The added value is that a case plan provides a road map for the legal staff, detailing tasks and anticipated timelines. The client receives detailed status reports accompanying file-stamped copies, which refer to events outlined in the case plan. If contingencies occur and trigger a fee increase, the plan provides an explanation of what has transpired, to accompany the request for additional fees.

Michael Moore, Lewis and Clark 1983, is a professional coach for lawyers and the founder of Moore’s Law, Milwaukee. He focuses in marketing, client development, and leadership coaching for attorneys at all levels of experience. Moore also advises law firms on strategic planning and resource optimization. He has more than 25 years’ experience in private practice, as a general counsel, in law firm management, and in legal recruiting. Visit www.moores-law.com.

The Death of the Billable Hour

One firm that has done away with the billable hour in favor of value billing is a Boston-based employment law firm, Shepherd Law Group (SLG). On its Web site, SLG explains that if the agreed job scope changes, the firm will send the client a change order setting out the new scope and the price for that change. The firm’s CEO, Jay Shepherd, recently observed on his blog, The Client Revolution, that while many lawyers claim they cannot offer fixed prices because they cannot figure out what a particular matter costs, lawyers do not need to know if they are making money on every particular matter. They simply need to know their law firm is keeping revenues above expenses and operating overall at a profitable level. Their focus should be on bringing in as many new matters as possible.

Business Process Control Required

Lawyers make their money by doing what they do best, practicing law. They should consider consulting with business professionals to implement process controls and maximize available resources. Before offering alternative fee arrangements, law firms must analyze each practice area to ensure that quality legal services will be provided in a timely, efficient, and cost-effective manner. Partners must select which clients and practice areas are suitable for alternative fee arrangements. In addition to the type of legal work contemplated, the nature of the specific client also is an important factor. A repeat client with consistently similar legal projects is a logical fit for a fixed-fee arrangement. A business client with a variety of legal needs may not be. An individual with a specific need for a lawyer’s service on a one-time basis may appreciate a set fee (as in the probate example) but the lawyer will need to be sure of his or her cost in providing the service.

Implementing alternative fee options effectively also requires firms to examine their practice management methods. Given the potential risk of loss, a process for approving an alternative-fee pricing decision is necessary. Procedures for both client and matter intake should be clearly articulated and enforced. Following an initial visit with a lawyer, the client has certain expectations that will guide the client’s thinking as the matter proceeds. Ideally, expectations will be based on what the lawyer actually said; however, in reality, the expectations usually will be based on what the client thought he heard. The better the information and the more realistic the client’s expectations, the more successful the attorney/client relationship will be.

Misunderstandings about fee arrangements might not surface until payment is due, and then the lawyer may find herself not being paid fully for her service. Prudent law firms will not wait until such losses are experienced to address their intake and pricing procedures.